Twitter earnings: Will product changes pay off as stock soars?

Social-media companies aren’t all created equal in the eyes of investors, but the winners and losers seem to be switching places.

As Facebook Inc. FB, -3.71%  has come under fire for its handling of data-privacy issues and political-advertising scandals, Twitter Inc. TWTR, -2.40%  stock has thrived. Shares are up 30% this year, while Facebook’s stock has declined 6%. The love for Twitter mainly stems from a series of product improvements that investors believe are getting users to spend more time on the platform, as well as the idea that Twitter can benefit from changes Facebook is making to its news-feed algorithm.

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When Twitter reports first-quarter earnings Wednesday morning before the bell, investors will find out whether the company has been able to convert its recent efforts in video and artificial intelligence into more eyeballs — and ad dollars.

“The key for Twitter is just continuing to execute,” BTIG analyst Rich Greenfield told MarketWatch. “It’s a story of improving the product, which leads to more users, and more opportunities for advertising.” He sees “continued evidence” that advertisers are embracing Twitter’s platform, thanks especially to the company’s focus on video.

Analysts expect that Twitter added 5 million monthly active users in its most recent quarter, according to FactSet, relative to the prior quarter. The FactSet consensus also calls for 10% revenue growth compared with the year-earlier period.

Twitter is likely to face questions from analysts over its own data-privacy practices, but Greenfield, who rates Twitter a buy, thinks the company has taken steps over the past 18 months to make its service “safer and more user-friendly.” Twitter is a much smaller company than Facebook, he said, and it has less data on its users, and allows users to remain anonymous while browsing the site.

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Still, privacy concerns have weighed somewhat on Twitter’s stock in recent weeks, after noted short-seller Andrew Left made a bearish call on the shares in part because he thought Twitter’s data-licensing business could become a target for legislators. It will be up to Twitter’s management to reassure investors that the company is handling and storing user information properly.

Twitter recently voiced support for the Honest Ads Act, which would require social-media firms to subject advertisements on their platforms to the same rules that govern print and TV ads. The company may also face questions about its efforts to weed out fake accounts and block extremist content.

Earnings: Analysts on average expect that Twitter generated adjusted earnings per share of 12 cents for the March quarter, up a cent from a year earlier, according to FactSet. On Estimize, a platform that crowdsources estimates from hedge funds, academics and others, the average projection also calls for 14 cents a share in adjusted earnings.

Twitter reported its first GAAP profit in history for the December quarter, but analysts surveyed by FactSet predict it will post a GAAP loss of 2 cents per share for the March period.

Revenue: Twitter is expected to have grown revenue 10%, to $607 million, in its most recent quarter, according to the FactSet consensus. Estimize calls for $620 million in revenue.

Stock movement: Twitter shares have soared 112% over the past 12 months, while the S&P 500 SPX, -1.34%  has gained 12%. The stock has risen after four of the company’s past 10 earnings reports, including double-digit percentage gains following the two most recent releases.

Of the 39 analysts who cover Twitter, seven have buy ratings, 22 have hold ratings, and 10 have sell ratings, according to FactSet. The average price target is $28.21, 9.6% lower than Monday’s closing price.

Video remains a key theme for Twitter, and it will be worth paying attention to commentary from the company about uptake for Twitter’s video-ad offerings.

“We believe Twitter’s video ad product continues to perform well as advertisers continue to look for higher quality online video impressions,” wrote Morgan Stanley analyst Brian Nowak, who recently upgraded the stock to equal weight with a $29 price target.

Also notable will be any indication of how Twitter could be helped or hurt by GDPR, a European data-handling regulation set to go into place on May 25. Investors in tech stocks tend to fret about data-privacy rules, but Oppenheimer analyst Jason Helfstein suggests that Twitter and its peers could actually benefit from the broad changes that aim to give EU residents more control over how their data is used by third parties.

“GDPR hurts email marketing,” wrote Helfstein, who has a perform rating on Twitter’s stock. “We believe marketers are likely to shift email marketing spending to social media, which has similar personal data.”

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It will also be worth looking for signs that Twitter has already started to benefit from changes that Facebook is making to its news feed, including de-prioritizing publisher content and viral videos.

Finally, there are Twitter’s AI efforts. For the past few quarters, management has discussed how artificial intelligence helps the company surface more relevant content for users, driving up engagement. This is “the single biggest challenge for Jack and the team,” Greenfield said, referring to Twitter CEO Jack Dorsey.

He thinks the company “still has a long way to go” on improving its AI capabilities but that the company’s moves so far in this area are a key reason why usage is up.

 Article written by Emily Barry